The FBR Has Failed. It’s Time to Let the Provinces Collect Their Own Cash.

The Problem, Stated Plainly

As we stand in May 2026, the fiscal arithmetic of Pakistan has reached a point of terminal absurdity. For decades, we have operated under the delusion that a single, behemoth organization headquartered in Islamabad—the Federal Board of Revenue (FBR)—can effectively extract taxes from a sprawling, informal, and diverse economy of 250 million people. The results are in, and they are damning. Despite dozens of 'reforms,' 'digitization drives,' and 'track-and-trace' schemes, Pakistan’s tax-to-GDP ratio remains stuck at approximately 9.2% (SBP, 2025). This is not just an economic failure; it is a structural design flaw that threatens the very sovereignty of the state.

The FBR is an institution designed for a colonial era—an extractive tool meant to funnel resources from the periphery to the center. In a modern federation, this model is an anachronism. It creates a perverse incentive structure where the four provinces wait like mendicants for their share of the National Finance Commission (NFC) Award, while the federal government takes the political heat for failing to collect. This 'rent-seeker' federalism has allowed provincial governments to avoid the hard work of taxing their own elites. By devolving tax collection powers, we don't just fix the balance sheet; we force a social contract between the provincial governments and their citizens. If a Chief Minister wants to build a metro or a hospital, they should have to look their own landlords and retailers in the eye and ask for the money.

The FBR is a Structural Bottleneck, Not a Solution

The fundamental argument for dismantling the FBR lies in the concept of 'informational proximity.' In a country where the economy is largely undocumented, tax collection is not a data-entry exercise; it is a boots-on-the-ground intelligence operation. A federal officer sitting in a regional office in Peshawar, reporting to a Chairman in Islamabad, has little incentive or local knowledge to penetrate the intricate networks of the local wholesale market or the real estate 'files' of a specific housing society. Conversely, provincial revenue officers—often part of the Provincial Management Service (PMS) or specialized provincial cadres—are deeply embedded in the local administrative machinery. They work alongside Assistant Commissioners and Patwaris who know exactly who owns which acre of land and which shop is turning over millions in cash.

The current system allows for a massive 'passing of the buck.' When the FBR fails to meet its targets, it blames the 'informal economy.' When the provinces face budget deficits, they blame the federal government for low NFC transfers. This cycle of irresponsibility has led to a situation where 72% of Pakistan’s tax revenue comes from indirect taxes (FBR, 2024), which disproportionately burdens the poor while the wealthy elite—the 'holy cows' of agriculture and retail—remain largely untouched. By devolving the power to collect income tax and sales tax on goods to the provinces, we eliminate the middleman. We create a system where the provincial government’s survival depends on its ability to tax its own constituents fairly and efficiently.

Furthermore, the FBR has become a victim of its own centralization. The 'Track and Trace' system, launched with much fanfare, has faced repeated implementation hurdles because it lacks the local enforcement buy-in required at the factory gate level. According to a 2024 PIDE report, the tax gap in the tobacco and cement sectors alone exceeds PKR 300 billion. A centralized agency cannot police every factory in the Indus Valley. However, a provincial government, incentivized by the fact that every rupee collected stays within the province (minus a federal service fee), would have a much stronger motivation to deploy its district administration to ensure compliance.

Competitive Federalism: The Missing Ingredient

Critics of devolution often cite the 'capacity gap' of the provinces. This is a self-fulfilling prophecy. If you never give the provinces the responsibility to collect, they will never build the capacity to do so. However, the evidence from the Sales Tax on Services (STS) tells a different story. Since the 18th Amendment, the provinces have managed their own service tax collections through bodies like the Sindh Revenue Board (SRB) and the Punjab Revenue Authority (PRA). These organizations were built from scratch and have consistently shown higher growth rates than the FBR’s collection of Sales Tax on Goods. In 2023-24, the SRB’s collection grew by 22%, while the FBR’s overall growth struggled to keep pace with inflation (SRB Annual Report, 2024).

Devolving tax collection would trigger 'competitive federalism.' Imagine a scenario where Punjab offers a slightly more efficient tax administration or a more rationalized tax rate for small businesses than Sindh. Capital would flow to the more efficient province, forcing the other to reform its own bureaucracy. This is how modern federations like Canada and Australia maintain fiscal health. In Pakistan, the current model is 'collusive federalism,' where all four provinces and the center agree to keep the status quo because it allows everyone to avoid taxing the powerful lobbies that fund their politics.

Moreover, the 27th Constitutional Amendment (November 2025) and the establishment of the Federal Constitutional Court (FCC) provide a new legal framework for resolving the inevitable disputes that will arise between provinces over 'place of supply' and 'origin of income.' We now have the judicial infrastructure to handle a decentralized tax regime. The argument that devolution would lead to legal chaos is no longer valid in the post-FCC era. We can have a 'National Tax Council' that sets broad policy and harmonized rates, but the actual collection—the 'muscle' of the state—must be provincial.

"The FBR is too big to succeed and too distant to care; only by bringing the tax collector to the province can we bring the taxpayer to the table."

The Counterargument — And Why It Fails

The most common defense of the FBR is the 'National Unity' argument. Federalists argue that a centralized tax authority is essential for redistributing wealth from richer provinces (like Punjab and Sindh) to poorer ones (like Balochistan and Khyber Pakhtunkhwa). They fear that if provinces collect their own taxes, the 'have-nots' will be left behind. This is a straw man argument. Devolving *collection* does not mean abolishing the *NFC formula*. The provinces can collect the revenue and then contribute to a 'Federal Divisible Pool' based on a constitutionally mandated ratio. The difference is that the provinces would be responsible for the *efficiency* of that collection.

Another argument is that businesses operating across provincial lines would face a 'compliance nightmare.' This is easily solved through technology. We already have the 'PRAL' (Pakistan Revenue Automation Ltd) infrastructure. Instead of one federal master, PRAL can serve as a shared digital backbone where a single filing is automatically split between provincial accounts based on the transaction's location. This is exactly how the GST works in India—a country far more complex than Pakistan—where the 'GST Network' (GSTN) handles billions of transactions across dozens of states seamlessly.

Finally, there is the fear of 'elite capture' at the provincial level. Critics argue that provincial assemblies are dominated by landlords who will never tax agriculture. But look at the current federal reality: the FBR has failed to tax agriculture for 77 years. Why? Because the federal government needs the support of those same provincial landlords to stay in power in Islamabad. By moving the battle to the provincial capitals, we make the issue local. It is much harder for a Chief Minister to explain why they are cutting the health budget when everyone knows the local landlords are paying zero tax. Devolution creates the political friction necessary for reform.

What Must Actually Happen — A Concrete Agenda

Dismantling a century-old bureaucracy cannot happen overnight, but it must begin with a clear legislative roadmap. We do not need more 'task forces'; we need a constitutional shift that aligns authority with accountability. The following four-step agenda provides a pathway to a decentralized, efficient tax regime by 2028.

Conclusion

The FBR is not just a failing tax office; it is a symbol of a centralized state that has outlived its utility. For too long, we have allowed the 'myth of the center' to prevent us from doing what is necessary. We have a 9% tax-to-GDP ratio because the people who have the power to collect (the center) don't have the information, and the people who have the information (the provinces) don't have the incentive. By dismantling the FBR and devolving collection, we align power, information, and incentive for the first time in Pakistan’s history.

This is not an attack on the dedicated professionals within the FBR; it is a critique of the impossible system they are forced to operate. Our civil servants deserve a structure that allows them to succeed. By moving tax collection to the provincial level, we empower our officers to become agents of fiscal change rather than administrators of a failing status quo. The choice is simple: we can continue to protect a centralized relic and watch our economy wither, or we can embrace a decentralized future and finally build a state that can pay its own way. The era of the federal tax-collector is over. The era of the provincial citizen-taxpayer must begin.